Rockwell Automation, Inc. (ROK) Earnings Call Transcript & Summary

I think that's very helpful examples. One more question specifically on LCS before moving to the broader business. Obviously, M&A has been a great tool for the company over the past several years to really expand the tool kit and the portfolio offerings. Matt, where -- anywhere do you see opportunities or gaps in your portfolio now? Where are you focused in terms of potentially adding inorganically?

Yes. I think that my segment has been very acquisitive over the last 5 to 7 years. We've done a lot of things to digest what we've had and bring it together. We do think that our cyber, our digital, our MES capabilities that are software-centric, more global delivery model oriented. We've really scaled out well there, and it's really helping us pay dividends. In the areas that we're going to continue to look at would be either geographic or industry-oriented domain expertise that would help us penetrate in some of those markets. But at this point, we feel very comfortable with the portfolio we got, the capabilities we got. My segment's organization is north of 7,000 people, and we have a very great diversity of talent and skills across the globe that we're trying to make the most of our time.

Terrific. So moving to the company on a broader level, I wanted to discuss orders. And I think a lot of the narrative over the last several quarters is focused on the company's ability to forecast order volumes, particularly as we see order patterns and backlog returning to more normalized levels. So maybe can you talk through the efforts you've made to improve visibility? Maybe a couple of the changes that you're making and forecasting over the last 6-plus months. And what you see as focus areas around that going forward?

Sure. Sure. I can take that. Well, as you know, predicting the destock levels at -- in the channel is not easy. That's not something Rockwell had to do before this whole supply chain crisis and the ensuing kind of a surge. So what are we doing now that's better than 6 or 12 months ago, where we're getting even closer to understanding our machine builder inventory? We always have very good visibility into distributor inventory. A lot of them are on this program called DMI, distributor-managed inventory. So in North America, we do have that. We actually manage there a set point -- the trigger points, we know the inventory levels. Outside of North America is not as precise, but we do have better visibility into that. Now the reason we actually reduced our guide yesterday, right, for the full year, it was really we underestimated just the amount of inventory, excess inventory sitting around machine builders. Some of them we sell directly and a lot of them buy through distribution. So it's not as easy to get that view of that inventory level, right? And so we work with our largest machine builders in North America and Europe. We assess -- we help them also assess Rockwell inventory at all of their plants and all of their locations and analyzing the burn rates, the inventory burn rates. What are the incoming orders from end users? And what are the expectations in terms of reaching that equilibrium? That's where we're getting better and better. It's not perfect yet. We're improving it. It's something we'll continue focusing on. But -- so that's why in the near term, the timing of that -- when does -- distributor channel and machine builders, when do they get to the equilibrium is then determined exactly where we end up for this fiscal year. But in general, we feel pretty good that we're making really good progress in assessing it better.

The follow-up to that is just trying to understand to what extent the fiscal fourth quarter orders guide, right, which is basically up very nicely sequentially double digits. To what extent does that capture your view of underlying demand?

Yes. No, it's a good question. So -- and by the way, so when you look at Q3 to Q4 inflection or step in orders, the majority of it is driven by what I just talked about. It's the clearing of excess inventory at machine builders largely, right? So that's the biggest driver. Some of it also is actually a [ max ] business. Lifecycle Services has this normal seasonality where Q3 to Q4, you have a step-up. So that's there and also some increasing impact of megaprojects. But the majority of it is really clearing. We are not embedding some kind of underlying end market change or improvement by verticals. It's really just the timing of that excess inventory being worked off. And that's what's really embedded in that Q4 number.

Right. And I guess as we transition back towards that more typical book-and-ship business that Rockwell historically was before we got into elongated supply chains, how do we think about the impact of the transition back to its more normal dynamics around pricing power? Because you spend a lot of time amidst the supply chain crunch trying to flex pricing muscles and changing some of your pricing programs. Where do we sit today around pricing?

We're very confident with our pricing ability and also our systems, as you mentioned, are much more robust now. We became much more resilient in the way we price and how quickly we can realize price and pass it on to our end users and our customers. And so as you know, before the pandemic, we've averaged about 1 point of price every year, give or take. That's net. And then the last few years, that was much higher, given that input costs were up significantly, so we increased our prices accordingly. Now we're in an environment where we're back to about 1 point of price. So for fiscal '24, we're still on track to get over 1 point of price, and we don't see that changing for the foreseeable future. What has changed, as we mentioned is, we've really changed our pricing methodology. So now if and when we need to increase prices really quickly to respond to something like cost inflation, we can do it right away and get the benefit by the way, so it's a lot more resilient.

Are there any indicators of accelerating cost inflation or -- perking its head up?

No. I mean as of now, as of Q2, both input cost and price are very much in line with what we guided to at the beginning of the year. So it's pretty stable. And we continue to go with our usual price increases. And so of course, there will be some negotiation as there always is, but we're confident in 1 point of price.

Great. You mentioned not really embedding some kind of underlying demand improvement in the back half. Maybe can you help us better understand the end market dynamics around some of the weakness you called out in semi and EV and the different hybrid markets? How do we or how do you think about the setup for demand improvement maybe moving past this year into '25?

Sure. And before that, let me just clarify what I meant about Q4. So it's really the demand on our machine builder is healthy. The demand on us is suppressed because of that extra excess inventory. As that inventory gets burned through Q3 and parts of Q4, most of our machine builders, not all of them, we'll see more of that come through to us. So I would say Q4 is much closer to being -- to reflect in that underlying demand because there's less and less excess inventory in between, right, kind of distorting the number. We are not fully there yet because there's still some excess inventory, I think, even at the end of Q4, but the majority will be kind of worked through. So we are close to kind of orders representing what's really happening at the end user, not quite. And then it's been the best time to enter our sales just because we don't have those component issues or supply chain issues anymore, right? So in Q4, we're going to get closer to that, not quite there. But my point was, on our call yesterday, on our earnings call, we talked about broadly, demand is good. But there are some pockets of softness in delay we've been hearing about it, right? So there's parts of CPG, especially in Europe, where there is some softness from an end user kind of CapEx standpoint. And we talked about automotive. While nothing is being canceled on the EV side, some start production dates have been pushed out. My point was in Q4, our inflection in orders and sales accordingly does not reflect some kind of heroic improvement in those 2 end markets. That was my point. Now as we look at going forward, we're very confident in our positioning across a lot of those end markets. Blake talked about it yesterday. We're getting this multimillion-dollar wins in this pipeline across many end markets, and it's not necessarily tied to the stimulus. That also will help as well. But a lot of these megaprojects or big spend is really about labor shortage, higher labor costs. People really want to be much more -- optimize the operations, have more visibility and that's going to help across automotive, food and beverage, life sciences, semiconductor, warehouse, which where we saw a lot of wins with logistics and shipping customers in the quarter. So it's really broad based in terms of that spend. Now the timing of the CapEx, for example, semiconductor, right, in terms of what's happening with the timing of when it's going to happen, we'll talk about it as we get to the end of this fiscal year.

I guess I would add one thing. My business does do a lot of direct business. So we have a good gauge on end market demands through our project business as well as then my MRO side, right, servicing that. And I would say Lifecycle Services is seeing a continued robust, healthy funnel and front log of opportunity across a lot of industries, across all the industries we serve. So we have a good pulse on there is steady demand and growing demand. We've seen, as Aijana said, some pushouts of some megaprojects like EV, obviously notable. Some of the semicon has been delayed in terms of like breaking ground. So we have line of sight to those as well. So I think the combination of what was said yesterday in terms of excess inventory of machine builders, that there is pretty steady demand out there across the board. I have -- my business would be sort of the bellwether internal in terms of, hey, is there something happening that we're seeing a fluctuation? Or is there a different demand and it's quite healthy at this point?

Right. A follow-up to that for both of you, but Matt, certainly, would like your perspective here. We've seen a number of chips projects awarded funding, right, in the last quarter. And this has been a strength historically for the company, semi, right? So talk to us about the sales cycle, the timing cycle from funding announcements to orders and orders to revenue, how you think about that timing and how you think about the revenue opportunity? I think it's a good example of megaprojects that are actually moving, right? So...

Yes. Definitely moving. In general, our opportunity is bigger than it has fortunately with more content, right? Between our traditional facilities, quality management systems, now with what we're doing with our iTRAK-type solutions to move wafers around. In now our digital and cyber offerings, we're engaging earlier in that sales cycle. If you think about it, like you have to get permits, you have to acquire the ground, you got to build the facility, you got to get power to that facility, which are all long lead items these days before you can get to your automation decision. So we're engaged much earlier in that sales cycle, and I think we're gaining share of wallet because we are helping them digitally emulate what that factor is going to look like, make their decisions maybe before they spend the money, like we were saying earlier on the digital consulting standpoint, working with then the cyber decisions before we even get into the content of that factory. But what we're seeing is there's been delays in many funding being released from governments to permitting. And then what I'll call the craft skills shortage in a lot of industries to actually build the facilities and then build up the industries around these facilities. We definitely have seen somewhat delays happen up in there. But very confident in terms of where we're positioned in those pursuits, being able to engage higher and earlier than ever before.

Yes. And power availability, too, right, it's starting to become a little bit of a gating factor. I'd be curious to know how you position ROK to help solve that thorny challenge, but it's coming across with all these big megaprojects and certainly, things like data centers. So I would love your perspective on that issue.

I think that is a gating factor currently in a lot of greenfields today. It is power, and some of the early decision-making capital that's spent there is when you have lead times that are north of 1 year for some of that content, it's delaying a lot of things downstream of it. And we've seen that across the board. I actually have a friend in the real estate industry who contact me because of that very problem. They're seeing it across multiple industries, not just industrial.

It's a good time to be in the switchgear business. All right. So I want to talk a little bit about cost actions because you announced a suite of accelerating cost actions yesterday. Can we just take another pass through the levers of cost reduction, understand what is really driving structural cost savings carrying on into next year?

Yes. Sure. So we talked about -- so yesterday, we talked about $100 million of cost reduction actions or benefits they're going to help us in the second half of this fiscal year. A lot of that is structural. So we talked about reduction in force. And a lot of it is in SG&A. So we've talked about some examples of sales and marketing, really focusing on prioritizing areas of highest growth, right? And so whether it's regions or particular products. There's some also on the operations side, just kind of aligning with where we are for this year and flexing to that. But a lot of that spend, a lot of those benefits are going to help us next year. So incrementally, we talked about another $120 million of savings in fiscal '25 from these actions we're taking here in the second half. And that's just before we talk about something broader in terms of the bigger productivity initiatives we're working on, and we'll talk about it next quarter. So $100 million, by the way, that's the same thing, that's the investment spend bucket that we talked about that's reducing now by $100 million. Those are aligned. And so a lot of those actions, we accelerated just given the lower outlook on orders for this year, but it's something we're already planning and contemplating as part of our longer-term margin expansion target. We talked about it at Investor Day. Remember, we kind of outlined margin targets by business segment. And a big part of that was -- in addition to growth was productivity, execution, right, and focus on that. And so that's all part of it, but we did kind of pull it in sooner given the environment and our lower outlook. So I would say a big part of that $100 million that we are going to have realized in the second half, it is going to be here for quite some time, it's [ structurable ].

And you mentioned you're going to give more details next quarter. But just help us understand what kind of opportunities you're focused on with respect to things like flexibility between SKUs, leaning inventory, capacity planning, the overall sort of manufacturing footprint of the company and how that can be leaned out from here? And I ask in the spirit of this is a company whose offerings are largely geared towards driving efficient manufacturing. So I know you've had a lot of time to think about this, and it seems like this is the moment to be implementing more action. So any details you can give us would be helpful.

Yes. I mean we've alluded to some of the examples. So for example, in Intelligent Devices, we have so many thousands of SKUs, right? So can we have more of a simplified SKU initiative or SKU rationalization? Can we look at how we approach direct spend, how do we approach sourcing and opportunities to reduce spend there, continue to look at manufacturing and where there's opportunity to leverage technology and synergies? So it's really broad. Again, we'll talk about it next quarter. So I don't want to talk too much about it, but there's a lot of opportunity to optimize our cost structure. It's not us just reacting to a near-term decline in orders because of the destocking, it's truly -- there's an opportunity to make us much more productive and agile and prepared for what's next.

We look forward to more of that. I believe we're at time, but I do want to thank you both for the thoughtful discussion. We look forward to more meetings with investors throughout the day. And for those of you who have joined us, thank you for your time. We hope you have a great conference. Take care, everyone.

Thank you.

Thank you.